EUR/RON*: 4.376 - 4.55 (March)
We have seen some tempering in non-residents’ appetite for Romanian debt instruments. Another sign is the weaker demand at Monday’s tender for 3y T-bond, eligible to be included in JP Morgan indexes (RON 0.9 bn vs. RON 2.9 bn for the same instrument in mid-January). In the context of this weaker appetite, the potential for RON appreciation looks limited as this was the main driver of RON firming lately. We expect RON to trade around the current levels vs. EUR in the period ahead.
As the key rate has been kept on hold at 5.25% (given elevated inflation, we expect annual inflation to accelerate to 5.8% in January from 5.0%, due to higher energy tariffs and food prices, and to remain in 5.4%-5.8% range in the first half of 2013), the focus at the NBR key rate meeting might have been on any hints about liquidity conditions and inflation forecasts. We see inflation at 4% yoy at the end of the year. Rates continued to hover well above the key rate levels, in spite of the NBR raising the repo cap to RON 10 bn from RON 6 bn over the past three weeks.
EUR/CHF: 1.227- 1.23 (March)
After the Swiss franc briefly depreciated above 1.25 against the euro, the franc now seems to have leveled off at 1.23. There are several arguments against a continuing linear devaluation trend in the CHF: firstly, the necessary normalization in the Eurozone has not yet taken place; secondly, the economic situation within the Eurozone has not recovered enough to start speculations of increases in interest rates (only a substantial widening in interest rate differences to the benefit of the EUR could sustainably weaken the CHF); thirdly, a sustainable weakening in the CHF would have to be accompanied by an increase in “carry trades” and we do not find any indications of this at this point in time; finally, future reversal of FX intervention (EUR FX holdings) will be an obstacle to a massive CHF devaluation. We therefore expect the EUR/CHF rate to trade within the 1.22-1.28 bandwidth over the next 3-6 months.
EUR/JPY: 124,3 - 116 (March), USD/JPY: 92.3 - 89 (March)
The yen’s devaluation against the US dollar fulfills itself in an oscillating way. After last week’s latest push, the waters are again calm. The once again rising political insecurities in the Eurozone weaken the euro and strengthen the yen, although this change will not be sustainable. By mid-year, we expect the yen to reach all new lows against the dollar. The EUR/JPY rate is calculated over the EUR/USD rate. A fact worth noting is that the weak yen is receiving political support. While the politicians maintain that the latest yen weakness is a result of a necessary adjustment following a yen that was overvalued since years and the end goal is fighting deflation in Japan, the fact of the matter is that to reach this goal, the swiftest way is by devaluing the currency. We see these appeasing statements in conjunction with the next G20 meeting on 15-16 February, where these exchange rate movements will certainly be echoed from Japan’s international partners.
EUR/GBP: 0.856 - 0.85 (March)
The GBP also lost against the EUR in step with other currencies. At the end of last week, the rate came in at 87 pence against one euro, making it the weakest rate since fall 2011. The latest change in movement must be viewed in the context of risk aversion on the part of investors following the political instabilities in Spain and Italy spilling into financial markets. Positive changes in Great Britain’s economic balance are taking place at a very slow pace. After the British economy recorded a drop in Q4 2012 once again, flash indicators have taken center stage. The latest industrial PMI surveys have surpassed the 50 mark, although subindicators for construction output fell in January. As long as the euro continues to trend strongly and the economic data coming from Great Britain does not improve, the GBP will continue to remain weak against the EUR.
EUR/CZK: 25.66 - 25.10 (March)
The The PMI from January brought a positive surprise after coming in at 48.3 points after December’s 46. Nonetheless, weak economic data continue to prevail and are likely to be influencing the central bank. In this week’s spotlight will be the monetary council meeting on 6 February and the choice of words made by the central bank following it. Especially the assessment of the EUR/CZK exchange rate will be of interest. We do not expect much to change here from what we have already seen in previous months; likely more verbal intervention and threats of FX interventions. The EUR/CZK should thus remain near the current 25.5 mark. Only after improvement in the economic situation and an end to verbal interventions will the EUR/CZ see the chance for sustainable gains.
EUR/HUF: 293.2 - 300 (March)
After weeks of unclear statements from Hungarian politicians that put pressure on the forint, some smooth talking recently stabilized the currency again. The EUR/HUF rate recovered from 300 to 292, although the phase of higher volatility is certainly not over. The successor to central bank president Simor is still unknown and will most likely not be named before the Eurobond issuance (currently Hungary is on road show throughout Europe). The longer PM Orban waits, though, the higher some market observers see the risk that the successor could be less market friendly and Orban does not want to endanger the Eurobond issue with an early release. An agreement with the IMF is no longer on the table, a fact that is also no longer being denied by officials. Within the weak economic environment (despite positive PMI data) and the insecurities being shown by the Hungarian central bank successor, we feel that a renewed weakening in the direction of EUR/HUF 300 is very likely.
